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CPI: No hard and fast rule for rate cut

Jun 21 2017 18:28
Lameez Omarjee

Johannesburg – Economists have mixed views on whether the latest inflation data could lead the Reserve bank to introduce a rate cut. 

Inflation for May was at 5.4%, up from 5.3% in April but still well within the target range between 3% and 6%, data from Statistics South Africa (Stats SA) revealed.

READ: Inflation remains within Reserve Bank target range

With inflation remaining within the target band, the case for the Reserve Bank to introduce a rate cut is greater, said Senior economist of Old Mutual Investment Group, Johann Els.

Els expects inflation to fall to 4.6% by July, increasing calls for a rate cut. The South African Reserve Bank (SARB) runs a risk of a policy error if a rate cut is not introduced before the end of the year, said Els.

Falling food inflation, particularly for bread and cereals and consumer goods inflation which includes clothing, footware and furniture reflect the effect of the weak economy. “Due to the weak economy, businesses are still finding it increasingly difficult to pass on any price increases to consumers,” said Els.

Petrol price cuts

Els also expects a petrol price cut of 50c/l in July, given a fall in oil prices to $45 per barrel as well as a stable rand.

“This supports the case for the July inflation number we are forecasting of around 4.6%,” he said. Inflation is expected to remain between 4.5% and 5% for the remainder of the year.  

For the past five months inflation has averaged at 5.9%, said Stanlib chief economist Kevin Lings. It is expected to average at 5.5% for the year, helped by falling food inflation and a lower oil price. “SA inflation could fall to below 5% in late 2017,” he said. Inflation could reach the midpoint of the target by early 2018, before stabilising to 5.5% in the second half of 2018.

When the Reserve Bank introduced rate hikes in 2015, it was in response to concerns about inflation and possible hikes by the US Federal Reserve Bank, which would have resulted in capital outflows from South Africa, explained Lings.

Cautious Reserve Bank

But in recent months inflation has surprised on the downside, said Lings. In the case of the weak economy, it is expected that the Reserve Bank would cut rates. However, South Africa remains vulnerable to changing investor sentiment given the recent credit downgrades and the Fed hiking its rates, he explained.

“Under these circumstances, although the Reserve Bank is likely to revise down its inflation forecast for both 2017 and 2018 it might not necessarily cut rates,” he said. A rate cut could help ease some of the pressure, but the SARB has to consider the risk of foreign capital outflows.

Stanlib expects the SARB to keep rates unchanged for the short to medium term.

Sanisha Packirisamy, economist at Momentum Investments, added that the Reserve Bank would likely remain cautious as it indicated financial stability risks continue to pose a threat to the domestic financial system.

A faster than expected rate increases in the US, coupled with lower commodity prices will have a negative impact on the currency. The rand is also still vulnerable to political uncertainty and decisions by ratings agencies.

If the rand weakens, then inflation could pick up again, limiting the scope to cut rates, said Packirisamy.

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